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Ralph Lauren Beats on Q3 Earnings

Zacks Equity Research

Driven by solid top-line performance along with leveraged selling, general and administrative (SG&A), Ralph Lauren Corp.’s (RL) earnings for the third quarter of fiscal 2014 surged 11.3% year over year to $2.57 per share. Moreover, quarterly earnings were ahead of the Zacks Consensus Estimate of $2.51.

Quarterly Highlights

In the quarter, Ralph Lauren's net revenue increased 9.2% year over year to $2,015 million, slightly above the Zacks Consensus Estimate of $2,011 million. The year-over-year growth was primarily driven by improved performance across the company’s wholesale and retail segments. Moreover, the company witnessed sales growth in every region with Americas, Europe and Asia registered high single-digit rise.

Overall, in the said quarter, retail revenues increased 6.4% to $1,130 million, wholesale revenues rose 14.6% to $840 million and licensing revenues declined 11.8% to $45 million.

Revenue growth at the retail division resulted from improvement in e-Commerce business and increased contribution from new stores, partially offset by unfavorable foreign exchange rates. The rise in wholesale revenues was mainly owing to increased revenues from the United States, better performance in Europe and favorable impact from transition of Chaps menswear operations. The year- over-year decline in licensing revenue was mainly due to license take-backs in Australia/New Zealand and soft performance of Chaps menswear operation.

Ralph Lauren's gross profit in the quarter increased 7.1% year over year to $1,172 million. However, gross margin contracted 110 basis points (bps) to 58.2% due to unfavorable foreign currency exchange rates and impact from the integration of the Chaps men’s sportswear operation.

Total operating expenses rose 6.2% year over year to $838 million, mainly due to overall business expansion as well as increased investments in growth initiatives and infrastructure. However, as a percentage of sales, it contracted 120 bps to 41.6% as increased expenses drive incremental revenue.

Ralph Lauren's operating profit improved 9.5% to $334 million from $305 million in the year-ago quarter, while operating margin expanded 10 bps to 16.6% compared with the prior-year quarter. The slight rise in operating margin mainly benefiting from the lower operating expenses as a percentage of sales more than offsets the gross margin contraction.

Exiting the quarter, Ralph Lauren operated 435 directly operated stores and 518 concession shops across the globe. Additionally, Ralph Lauren’s global licensing partners operated 57 Ralph Lauren stores, 13 dedicated concession shops as well as 105 Club Monaco stores and dedicated shops.

Balance Sheet

Ralph Lauren exited the quarter with cash and investments of $1.4 billion compared with $1.3 billion in the previous-year quarter. During the quarter, the company deployed $81 million toward capital expenditure. Moreover, inventory levels stood at $1,117 million, up 13.9% from $981 million in the comparable period last year.


Bolstered by improved quarterly results, Ralph Lauren now expects its sales for the fiscal to increase by 7% compared with its earlier guidance range of 5% – 7%. However, looking at the current margin trends, Ralph Lauren now anticipates operating margin to contract in the range of 110 – 120 bps, up from its previously guidance of contraction of 75 bps.

For the fourth quarter of fiscal 2014, the company expects net revenue to increase by 10% –12%. Operating margin is anticipated to increase in the range of 50 – 90 bps from the year-ago level of 11.1%.

Other Stocks to Consider

Currently, Ralph Lauren holds a Zacks Rank #4 (Sell). However, some better-performing stocks which may be considered in the apparel-retail industry include Columbia Sportswear Co. (COLM), Gildan Activewear Inc. (GIL) and Michael Kors Holdings Ltd. (KORS). All of these carry Zacks Rank #2 (Buy).

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